Alfred P Sloan, Jr.`sAlfred P Sloan, Jr.`s MY YEARS WITH MY YEARS WITH

GENERAL MOTORS GENERAL MOTORS

a study by

Ravi Raj Sagar

Coverage- Part ICoverage- Part I The great opportunity Concept of the Organization Product Policy The air-cooled engine Coordination by committee Financial Controls Transformation of the Automobile Market Policy Creation Introduction by Peter Drucker

1908:The saga begins1908:The saga beginsHenry Ford announces Model T.William Durant (Buick Motor Co) forms

General Motors Company1909:Durant buys in Buick, Olds, Oakland

and CadillacAlso buys in several parts manufacturersLands in a capital crunch : CRISIS 1

Henry FordHenry Ford

Ford Model T(car of the century)Ford Model T(car of the century)

William C DurantWilliam C Durant

The Years 1910-1915The Years 1910-1915 1910: Banker`s trust comes in to finance-

5 year note issued; takes over management Durant forced out; joins up with Mr. Chevrolet Nash appointed president of GM 1915: banker`s trust expires Pierre Du Pont takes over as Chairman Meanwhile, Chevrolet has quietly been acquiring

GM shares in the market

Durant regains control of GM through Chevrolet`s majority ownership of GM stock

Nash resigns; goes on to form Nash Motor Co Durant consolidates GM: Buick, Cadillac made

divisions 1918: buys in Chevrolet, Fisher Body Also: Sloan`s Hyatt Roller bearing Co (turned into

United Motors with Sloan as President) Starts Consumer Financing co, buys Tractor co &

Frigidaire

Return of the prodigalReturn of the prodigal

Heading for another crisisHeading for another crisis Thanks to Mr. Durant, GM had the makings of a

great enterprise But, Physically un-integrated, Management-wise

un-coordinated Expenditures for new companies, plants and

equipment, inventories running very high `GM was heading for a crisis from which the

modern General Motors Corporation would emerge`

GM expansion 1918-20 without a policy of control Durant`s policy of expansion was essentially sound

though, given the extensive capital structure of the automobile industry

Overruns on expansion appropriations and inventories by divisions

Effort to raise $85M realizes just $11M, despite sales increase from $270M in 1918 to $567M in

1920 Sloan made chairman of `Committee on Appropriation

Request Rules`

Crisis 2 : 1920Crisis 2 : 1920 Total corporate inventories Jan 1920: $137M, Oct 1920: $209M exceeding limit by $60m In Sept, the bottom drops out of the automobile market Mr. Ford cuts his prices 20-30% GM having difficulty paying invoices and payroll;

borrows $83m All GM car divisions, except Buick & Cadillac, virtually

shut down US economy in a slump

Organization StudyOrganization Study `Before these events, I had become increasingly

disturbed by affairs in GM` Developed a plan of organization in 1919-20 to correct

deficiencies Presented it to Mr. Durant who accepted it favorably but

did nothing about it, preoccupied as he was in the financial state of the

company Closure of plants, break in stock market prices brings an

end to an era in GM Resignation of William Durant

Immediate task-reorganizationImmediate task-reorganizationCollision of GM expansion and business

cycle, with Durant`s method`s letting things go out of control

Co faced slump outside, management crisis inside

Task 1921: reorganizationConfidence, caution, flexibilityPierre du Pont new President

A new beginningA new beginningPierre du Pont`s Executive Committee:

du Pont, Raskob, Haskell, SloanAdopts Sloan`s `Organization Study`

which becomes foundation of policy in modern GM:

expression of basic principles of `decentralization`

The basicsThe basics No knowledge of contribution of individual

divisions Hence, no way of determining where efficiencies

or inefficiencies lay No objective basis for allocation of new

investment Aim of business to earn a return on capital; in case

not happening, deficiency to be corrected or activity abandoned for a more favorable one

Price determinationPrice determinationDivisions selling to external customers:

market-determined price- desirable return –expansion justified

For inter-divisional sales: cost plus a pre-determined rate of return; but with competitive comparison

Principles of OrganizationPrinciples of Organization Responsibility of CEO of each division will in no

way be limited; each organization complete in every function to exercise full initiative and development

Certain central organization functions essential to development and control of corporation’s activities

Contradictory language in the two points above

Elements of the planElements of the planPlan adopted 1920Provision for advisory and financial staffs

without line authorityDistinguishing policy from administration

of policy, specifying location of each in the structure

Concept formulated as decentralized operations with coordinated control

Beginning to get controlBeginning to get control‘In six months, I became EVP in charge of

all operations’‘We were getting control of runaway

elements of the business particularly the inventory’

Next order of business – policy on the line of cars to be produced

Product PolicyProduct PolicyPattern of variety established by Durant as

expressed in seven linesSpacing of ten cars in seven lines expressed

its irrationalityNo position in the low price area, Chevrolet

priced $300 above Model TOnly Cadillac and Buick leaders in their

price class

Price spectrumPrice spectrum Chevrolet “490” $795 - $1375 Chevrolet “FB” $1320 - $2075 Oakland $1395 - $2065 Olds $1445 - $2145 Scripps-Booth $1545 - $2295 Sheridan $1685 Buick $1795 - $3295 Cadillac $3790 - $5690

ChevroletChevrolet

BuickBuick

Situation AnalysisSituation Analysis GM 1920 sales: 330,000 cars

Chevrolet : 130,000; Buick : 112,000

Rest : 88,000 GM sales $567M; Ford $644M No competition to Ford in low price Duplication in middle class: identical price of

Chevrolet FB, Oakland & Olds No justification for Sheridan & Scripps-Booth

Rationalization of product lineRationalization of product line All cars except Buick & Cadillac were losing

money GM share down 17 to 12% in 1921 Ford up from 45 to 60% Chevrolet 4% vs Ford 60% - strategy: to take a

bite from the top of his position Sheridan, Scripps-Booth dropped Line-up: Chevrolet, Oakland, Buick, Olds,

Cadillac

Air-cooled engineAir-cooled engineConflict between Research orgn and

producing DivisionsParallel conflict between Top mngt and

Divisional mngtSubject: a revolutionary car with an air-

cooled engine of Mr Kettering`s design

Mr. Charles Kettering, Mr. Charles Kettering, Inventor at GMInventor at GM

Rough ride for AC engineRough ride for AC engine Plans to make the air-cooled engine operational on

Oakland and Chevrolet do not succeed Sloan`s ability to ride in two boats Supporting du Pont and Kettering`s hopes for an

air-cooled engine Supporting Divisions` production of conventional

water-cooled engines Change of DM at Chevrolet

Again, Sloan`s ability to work out a solution:

exclusive air-cooled at Olds

dual production at Chev

exemption to Oakland

Production problems continue to dog the air-cooled

The turning pointThe turning pointTwo decisive events make 1923 another

turning pointOne: greatest boom year- industry`s first 4

million vehicles yearTwo: air-cooled Chevrolet field problemsSolution obvious: make the conventional

Chev to meet demandDu Pont recommends Sloan to succeed him

Alfred P Alfred P Sloan, Jr.Sloan, Jr.

Sloan, President, GMSloan, President, GM

Sloan goes along with Divisions to produce conventional water-cooled engine cars

Kettering (Research chief who had been pushing for the air-cooled engine) offers to resign

….??

The artful managerThe artful managerSloan sets up a separate divn for air-cooled

prodn & sales under KetteringThe great boom was on; the air-cooled died

a natural deathKettering and staff went on to develop

tetraethyl lead, hi-compression engines, non-toxic refrigerants, 2-cycle diesel engine..

The Sloan visionThe Sloan vision Sloan era begins 1923: power of great demand

acts as a disciplinary force `Time to gather ourselves, to coordinate` Role of Executive Committee: confine itself to

principles rather than become a group management

`A group can make policy, but only individuals can administer policy`

Add Operating Mngrs to EC

Co-ordination by committeeCo-ordination by committee General Purchasing Committee: meets with

limited success Advertising committee: to publicise parent orgn

(by BDO) General Technical Committee: brings Research

and Divisions together – builds Proving Ground; study group- papers on control of cylinder-wall temp, cylinder heads, sleeve valve engines, transmissions, ..fuel and metallurgy

The Proving GroundThe Proving Ground

General Sales Committee: made up of divnl sales mngrs

Works Managers CommitteePower and Maintenance staff committeeOperations committeeStudy in 1924 confirms this format of

committees best form of co-ordination

Financial ControlsFinancial Controls Legacy of overruns on appropriations, inventory

runaway, resulting in cash shortage Project evaluation principles laid down- technical

feasibility, return on investment, desirability for the corporation

New cash control system set up: moving cash from divns to a 100 banks nationwide

Now, to handle runaway inventories…??

Inventory ControlInventory Control Declaration of emergency: buy nothing, stop all

incoming purchases Review of all purchases in person with GMs System of controls: 4 months forecast of sales,

production, materials and payroll Inventory reduced from $215M in 1920 to $94M

and its turnover doubled With passage of emergency, control reverted to

divisions

Key to co-ordinated control of Key to co-ordinated control of decentralized operationsdecentralized operations

`If we had the means to review and judge the effectiveness of operations, we could safely leave the prosecution of those operations to the men in charge of them.`

Financial control- cost, price, volume and rate of return on investment

Brown`s famous paper on economic cost of capital - `Pricing policy in relation to financial control`

Depression year 1932- co remains in black

Transformation of the Transformation of the Automobile marketAutomobile market

Before 1908- class market 1908-mid 20s – mass market Then mass-class market Four elements that transformed the automobile

market: installment selling used-car trade in closed body annual model

Product improvement strategyProduct improvement strategy 1925: K Model- improved Chevrolet, with longer

body, more leg room, Duco finish, 1-piece windshield with automatic wipers,.. Recovers Chevrolet position with 64% rise in sales Ford`s sales declined relatively from 54% to 45% -

a danger sign if Mr. Ford had chosen to read it (Who had brought in Chevrolet? And the profitable

Buick & Cadillac as well?)

Fortifying the line-upFortifying the line-up Ford $290 Price advantage still to Ford at low-end (What led to the ultimate downfall of Model T?) GM Line-up: Chevrolet $510, Olds $750, Oakland $945, Buick 4 $965,

Buick 6 $1295, Cadillac $2985 Gap in GM line-up at the top end Filled with family car La Salle $2000 Another danger spot between Chevrolet and Olds New 6-cylinder car to share economies with Chev on body

and chassis parts: Pontiac

Cadillac La SalleCadillac La Salle

PontiacPontiac

The fall begins for FordThe fall begins for Ford Essex coach with closed body in 1925 Has a good run Chevrolet`s closed body volume up to 82% in

1927 Model T with its light chassis was pre-eminently

an open-body design- became obsolescent Ford closes River rogue plant for retooling,

leaving field to Chev and Chrysler`s Plymouth

The light chassis on which The light chassis on which Model T was builtModel T was built

Car no longer seen as fulfilling Car no longer seen as fulfilling just `transportation` needjust `transportation` need

Basic transportation being met by used-car trade in

Again, Ford`s low-cost static model did not fit in with the new reality

Customers wanted more power, comfort, styling in cars aided by trade-in and installment financing

Leading to Annual model offering `more car per car`

Introduction by Peter DruckerIntroduction by Peter DruckerSloan was first to work out systematic

organization in a big companyPlanning and strategy, measurements,

decentralization- ie basic concepts of the discipline of management

His work as designer and architect of management was a major element in America`s performance in WW II

Leading to its dominant economic position

The professional managerThe professional managerStill, to Sloan, the discipline of management

came a distant second to the `profession of the manager`

Two classic approaches in management:Constitutionalist approach`Education of the prince` traditionTo Sloan, the core was the latter, the

manager as a leader, examplar

Sloan, the managerSloan, the managerComes across as cold and impersonalBelieved that a CEO must not have friends

on the job`Be impartial and judge by performance`He had tremendous personal warmth and

generosityBuilt GM as much through inspiring

personal admiration and integrity

Heads of Chevrolet, Buick, Cadillac became Sloan-admirers and team members

People-focused and respectful of them

Main lessons from the bookMain lessons from the bookA. Management is a profession and a

manager should be a professional.B. Like any other professional, a physician

or a lawyer, for instance, the professional manager has a client: the enterprise.

C. Professionals do not make decisions according to opinions or preferences; but, by facts.

D. Job of a manager not to like people, but to put their strengths to work. Performance alone counts.

E. Performance more than bottom-line; it is also setting an example, which requires integrity

F. Dissent, even conflict, are desirable.G. Professional manager is a servant.